Crediting Wonkette

As I MUST. She's got the right take on Wolfowitz's testimony yesterday:

Paul Wolfowitz fesses up on why Iraq isn't going so well: "We had a plan that assumed we'd have basically more stable security conditions than we've encountered."

Among those assumptions: That Iraq was a magical country, where lollipops grew on trees and the clouds were made of marshmallows! With gumdrop mountains and fruit-punch rivers and houses made of gingerbread!

AB

P.S. Homer Simpson did say, "Oh look at me !!! I'm making people happy! I'm the magical man from happy land, with a gumdrop house on lollipop lane! Oh by the way ... I was being sarcastic." But I don't think Homer talked about ***-******* (regular Wonkette readers will know what each asterisk stands for. Childless couples unfamiliar with the procreative process should probably not try to figure it out.)

Almost Missed This One

Via TBogg, this story from the Washington Post:

The House would not only make permanent the $1,000-per-child tax credit enacted as part of the 2001 tax cut but would dramatically increase the income limits for eligibility. Currently, married families with incomes of up to $110,000 receive the full credit; the bill would more than double the income ceiling, to $250,000. Under existing law, families with two children and incomes up to $149,000 receive a partial tax credit; the bill would make that partial credit available to families with two children and income of between $250,000 and $289,000; families with three children would be entitled to the partial credit up to an income of $309,000.

In 2002, 5% of households (about 5.5 million households) earned more than $150,000/year, so there are somewhere probably around 10 million households earning between $110,000 and $250,0000. In the grand scheme of things, this proposal wouldn't cost all that much, roughly $10 billion (which would only increase the federal deficit by under 2%.)

At the same time, $1,000 really doesn't do much for families earning more than $110,000. Certainly, it would be nice to have even for these relatively wealthy families, but it's not going to really affect them in any significant way. For comparison, ask yourself how you would react to a raise of less than 1%.

So I can only conclude that this proposal is just a matter of principle: we need to take another 8 or 10 billion dollars from everybody (i.e., the people responsible for paying the deficit) and give it to the top 5%. Why? Not to make the economy or the lives of the wealthy better in any meaningful sense, but just because we can. At least, so say House Republicans.

AB

P.S. Technically speaking, of the 5.5 million households in the top 5%, 710,000 have a head of household over 65 and so probably don't have dependant children. And some portion of the under 65 households also lack dependants. So the total number of beneficiaries is probably well under 10 million, so the cost of this proposal is probably under $10b. But the point remains true: it's hard to see this as anything other than a principled transfer of 5 to 10 billion dollars -- from everybody, to the top 5% or so.

In fact, upon inspection, the Post story says the proposal would cost "$69 billion through 2014," which is about $7b per year.

RSS, Revisited (yet again)

It was down for a few days, either due to my messing with the template or Google's makeover of Blogger. I think it's fixed now, but if not, let me know in email or comments.

I've also changed the settings so that permalinks point to individual posts, rather than entire pages. I'm hoping that this will make search results more useful. Previously, seaches would always open the page with the relevant post, but would not center on the desired post.

AB

Take two Viagras and call me in the morning

Childless couple told to try sex:

The University Clinic of Lubek said they had never heard of a case like it after examining the couple who went to see them last month for fertility tests.

Doctors subjected them to a series of examinations and found they were both apparently fertile, and should have had no trouble conceiving.

A clinic spokesman said: "When we asked them how often they had had sex, they looked blank, and said: "What do you mean?".

"We are not talking retarded people here, but a couple who were brought up in a religious environment who were simply unaware, after eight years of marriage, of the physical requirements necessary to procreate."

Via Pandagon.

AB

Texas

A few months ago, I wrote this:

At some point, can we just move Austin and its residents to some other state, give Texas over to the fundamentalists and evangelicals, and then let Texas secede? Maybe we could bring Houston along too, but not Dallas.

Patrick Hayden has now seconded the motion in a post headlined "Via Julia, further evidence (free reg. req.) that Texas should be thrown out of the United States, if not sawed off the mainland and pushed out to sea."

AB

Abu Ghraib Summary

Kevin's got a good, but depressing, overview of what we know to date about the events in Abu Ghraib.

AB

Alan Greenspan: “The Maestro”?

Yesterday Bush formally nominated Alan Greenspan for his fifth four-year term as chairman of the Federal Reserve Board. In his written statement accompanying the nomination, Bush said that “Alan Greenspan has done a superb job as chairman of the Board of Governors of the Federal Reserve System, and I have great confidence in his economic stewardship.”

Many in the financial world agree; in fact, Greenspan is often referred to as “the Maestro” of economic policy-making in the business press. “Maestro” was even the title of a Bob Woodward book about Greenspan. Is such high praise warranted? My answer is an unambiguous no.

For historical context, the following chart shows the Federal Funds rate (the interest rate most directly controlled by Alan Greenspan) since the year before Greenspan took the helm of US monetary policy in 1987.



How good was Greenspan's management of interest rates during this period? Let's take a look at some important episodes.

October 1987: The stock market crash. Greenspan received widespread credit for quickly injecting liquidity into the US economy, helping to prevent the stock market crash from affecting the economy more generally. He probably did the right thing, though it would have taken an idiot to fail to recognize that increased liquidity was needed immediately after the stock market crash.

1989: The economy was booming. Greenspan tried to engineer a “soft landing” by raising interest rates enough to slow the economy from the heady pace of 1988-89 without sending the economy into recession.

1990-91: Greenspan's "soft landing" clearly failed. He raised interest rates too high to fast, the US economy entered a recession, and he immediately (but too late) had to reverse course and lower interest rates.

1991-93: Greenspan tried to help end the recession by reducing interest rates. He lowered them slowly, however, and arguably not far enough. Though the recession was deeper than the 2001 recession, interest rates never went below 3%, and only reached that level in late 1992 – a full two years after the worst part of the recession.

1994-95: The economy was recovering smartly. Greenspan implemented a sharp increase in interest rates, wreaking havoc in the bond markets. The rise in interest rates was so sharp and fast that the US economy slowed dramatically in 1995, and nearly went into recession. Once again, Greenspan had to reverse course and quickly lower interest rates to undo his overeager increases.

1998: The failure of Long Term Capital Management (LTCM). The collapse of this hedge fund nearly paralyzed the US’s entire financial system. It was a financial disaster narrowly averted by careful Fed action (mainly in the form of coercing major banks to help out LTCM). However, Greenspan had little or nothing to do with this; it was NY Fed chairman William McDonough who orchestrated this narrow escape for the US economy.

1996-2000: The boom of the 1990s. Greenspan did virtually nothing to change monetary policy. The economy did great. However, financial and investment bubbles gathered strength and set the stage for the extremely sharp contraction in both the stock market and business investment in 2001. Many have argued that a tighter monetary policy during this period would have prevented a lot of future economic pain. On the other hand, few have argued that the strong US economy of the late 90s was due to magical monetary policy-making.

In short, I think that Greenspan has done some things correctly (including the sharp reduction in interest rates in 2001-02), but has also done many things clumsily. Far from being a master of monetary policy, I would describe his performance as mediocre.

In addition to his handling of interest rates, one might also judge Greenspan based on the advice and counsel that he has given the president, Congress, and the financial markets over the years. In this category, I would describe his performance as awful. He has talked of financial excess without doing anything about it; advocated tax cuts when the vast majority of economists could see that they were clearly fiscally irresponsible; and used his position to advocate his personal preference for a reduction or elimination of the Social Security program.

Put it all together, and I think that it’s time for a new Fed chairman. But it looks like we’ll have to wait a few more years.

Kash

Josh Marshall on Kerry’s Strategy

Josh Marshall has a good piece on TPM about Kerry’s strategy of more-or-less lying low while Bush’s popularity falls. The punch line:

Here's the point I'd like to discuss in a bit more detail: the fact that Kerry can't get a lot of attention to himself right now or that he's not seizing the opportunity to make the case against Bush. I don't think this is a bad thing at all. At least not for now.

Let's think of this battle as a prize fight, with both men in the ring. If you're up on points and the seconds are ticking down on the final round, what do you do?

Simple: stay out of his way.

Trying to land punches when he's desperate and going down gives him the opportunity to hit back. And in such a dire moment that may be all he has. Why give him the opportunity?

You can read the whole piece here.

Kash

GOP Logic

I understand that the Republicans' campaign strategy is to portray Kerry as inconsistent. But today’s talking point seems pretty weak, even by the low standards of the Bush campaign.

As you probably know, the Bush administration (true to form) is bull-headedly sticking with a plan that was originally devised in 2001 to fill the US's Strategic Petroleum Reserve (SPR). Nevermind the fact that the relevant circumstances have changed dramatically over the past few years.

On the other hand, Kerry has called for some release of oil from the SPR to help moderate the rather high price of oil (in addition to several other policy suggestions). At a minimum, Kerry has suggested that the US government stop buying additional oil for the reserve while prices are so high, since the government’s extra demand can only serve to make things worse.

The GOP’s response? They point out that in 2000, Kerry said that oil should not be released from the oil reserve. Aha! Gotcha, John Kerry!

But wait. I think that the GOP should continue with this logic, and point out that flip-floppers abound in everyday life as well as in politics. In 2000 I said I didn’t want to take a summer vacation in California, yet this summer I’m doing exactly that! Clearly I’m a flip-flopper. In 2000 John McCain said he wanted to be president over George Bush, yet this year he’s not even running! Another flip-flopper. In 2000 lots of people wanted to buy shares in Lucent for $50 per share, while today no one is willing to pay even $4. Flip-floppers, all of them.

Try this logic out on your family and friends. I think you’ll find it a powerful tool.

Kash

Do Gas Prices Make a Difference?

A study released today by the Travel Industry Association of America indicates that Americans plan more summer travel than last year. Some media outlets are misinterpreting this as evidence that high gas prices may affect travel less than some people have expected. The reason that it's a faulty inference, of course, is that really one should compare how much people travel this year with high gas prices with how much they would have traveled this year with lower gas prices, not with how much they traveled last year.

Nevertheless, I find it moderately plausible that people’s driving plans have not yet changed much due to higher gas prices. Does this mean that higher oil prices won’t have much of an effect on the economy?

Not necessarily. The main way in which higher oil prices affect the economy is not by shortening summer road trips. More important are the effects of higher oil prices on energy inputs to firms, and the possible broader inflationary effects that this has on the economy. Higher interest rates result, which impose their own drag on the economy. These negative effects on the economy are not nearly as great as they were 20 years ago, but they still exist. (See this nice primer from the Dallas Fed for more about this.)

One interesting theoretical note: if you think about it, it is not immediately clear that higher oil prices should lead to higher inflation in general. In a world of smoothly-adjusting markets and prices, then when the price of one type of good rises, we would expect the prices of other types of goods to fall. In other words, a rise in the price of oil is just a rise in one particular relative price. All we should expect is to see the price of energy-intensive goods rise relative to the price of non-energy-intensive goods. However, we do in fact see a positive relationship between oil prices and inflation more generally. This therefore constitutes indirect evidence that prices do not in fact adjust freely in our economy. As Keynes famously pointed out 70 years ago (and many others less famously), prices are sticky.

The bottom line: while summer travel plans may not be noticeably curtailed, I still expect to see some summer slowdown in the economy as a result of recent oil prices.

Kash

Question

Who will be the first conservative blogger to note the horrible prison fire in Honduras and -- as an exculpation -- point out that, as with Saddam, that too is worse than what happened in Abu Ghraib.

AB

From the UPI

Yes, from the same UPI that's owned by Reverend Moon (who also owns the Washington Times):

WASHINGTON, May 18 (UPI) -- Efforts at the top level of the Bush administration and the civilian echelon of the Department of Defense to contain the Iraq prison torture scandal and limit the blame to a handful of enlisted soldiers and immediate senior officers have already failed: The scandal continues to metastasize by the day.

Over the past weekend and into this week, devastating new allegations have emerged putting Stephen Cambone, the first Undersecretary of Defense for Intelligence, firmly in the crosshairs and bringing a new wave of allegations cascading down on the head of Defense Secretary Donald Rumsfeld, when he scarcely had time to catch his breath from the previous ones.

Even worse for Rumsfeld and his coterie of neo-conservative true believers who have run the Pentagon for the past 3½ years, three major institutions in the Washington power structure have decided that after almost a full presidential term of being treated with contempt and abuse by them, it's payback time.

Those three institutions are: The United States Army, the Central Intelligence Agency and the old, relatively moderate but highly experienced Republican leadership in the United States Senate.

[snip to conclusion]

... Rumsfeld and his team of top lieutenants have therefore now lost the confidence, trust and respect of both the Army and intelligence establishments. Key elements of the political establishment even of the ruling GOP now recognize this.

Yet Rumsfeld and his lieutenants remain determined to hang on to power, and so far President Bush has shown every sign of wanting to keep them there. The scandal, therefore, is far from over. The revelations will continue. The cost of the abuses to the American people and the U.S. national interest is already incalculable: And there is no end in sight.

The remainder of the article is mostly and overview of the material from The New Yorker and Newsweek pieces, along with a defense of Sy Hersh's credibility.

AB

Hersh Denial

If everything Hersh wrote is true, this sounds exactly like what the Pentagon would say. On the other hand, it also sounds exactly like what the Pentagon would say if everything Hersh wrote is false.

AB

Where's the Blogroll?

It's to the right, along with the Rumsfeld Wire, hit counter, RSS feed, and the Archives. Now everything that runs a script is in the right panel and will be brought up after the center panel. Everything in the left panel is hosted directly on the Blogger servers and requires no scripts.

AB

At Least He's Not Joe Lieberman

I'm still pondering the merits of McCain as a veep choice, though I'm pretty sure that I'm against it. Basically, it still seems so unlikely that it's not worth considering too carefully. Besides, Mark Kleiman's done some of the thinking for me so I don't have too.

But there is one factor weighing strongly in favor of John McCain: he's not Joe Lieberman, who yesterday embraced torture

On CNN's "Late Edition with Wolf Blitzer, Sen. Joseph Lieberman (D-Conn.), a member of the Armed Services Committee, called the allegations serious and said they should be investigated. But, he said, if a special interrogation unit focused on suspected terrorists could have prevented Sept. 11, "I don't think there are many Americans who would say we shouldn't use whatever means are necessary to extract that information."

Great point, you sanctimonious twit. One question: how do you know who to torture? Many of us, including me, will agree that if we (1) Knew something like 9/11 was going to happen, and (2) Knew and had access to those with the information needed to prevent said attack, then we'd endorse applying whatever force is necessary to extract the information (others might choose to draw an absolute moral line and still object.) But in virtually any case where conditions (1) and (2) hold, we would already have the information needed to stop the plot.

So Joe's either engaging in more self-aggrandizement or he's endorsing widespread torture in the hopes of finding a needle in a haystack. If the latter, what's the right yield rate (accurate tips per person tortured) and what's the threshold number of prevented deaths? (The footnote to this old post has some thoughts on acceptable ratios of punishment of the innocent to punishment of the guilty.) Until he can answer the tough questions, Lieberman should stick to complaining about indecent video games and blaming stuff on Hollywood.

Back to the McCain question, not being Joe Lieberman is a major plus for him, but many other viable candidates (I'd venture to say all but one) cross that threshold as well (I like Kleiman's idea of Zinni or Shinseki.) I do, however, like McCain heading State or Defense -- positions where his experience and multilateral appeal could add a lot of value yet he would have little purview over areas where his conservative views would be problematic (e.g., judicial appointments.)

AB

In Good Company

The following is a screenshot of the Rumsfeld Wire from Sunday afternoon and evening:



Angry Bear, Atrios, CalPundit, Josh Marshall, and the DCCC's blog: birds of a feather.

AB

P.S. Alert or suspicious readers may note that it appears I pasted two different shots from the Rumsfeld Wire. The break in the image is there because the only way I know how to take screenshots is with Acrobat, which I couldn't get to make one continuous page. Since the page broke right in the middle of the Wire, I had to append the two halves.

UPDATE: Wow, just hit "Prt Scr" and paste the clipboard into your favorite application -- it's that simple! How did I manage never to learn that?

Ambassador Atrios

Atrios is running a pledge drive this week. Meanwhile, by way of Mark Kleiman, I find this in today's Washington Post:

Of the 246 fundraisers identified by The Post as Pioneers in the 2000 campaign, 104 -- or slightly more than 40 percent -- ended up in a job or an appointment. A study by The Washington Post, partly using information compiled by Texans for Public Justice, which is planning to release a separate study of the Pioneers this week, found that 23 Pioneers were named as ambassadors and three were named to the Cabinet: Donald L. Evans at the Commerce Department, Elaine L. Chao at Labor and Tom Ridge at Homeland Security. At least 37 Pioneers were named to postelection transition teams, which helped place political appointees into key regulatory positions affecting industry.

... When Kenneth L. Lay, for example, a 2000 Pioneer and then-chairman of Enron Corp., was a member of the Energy Department transition team, he sent White House personnel director Clay Johnson III a list of eight persons he recommended for appointment to the Federal Energy Regulatory Commission. Two were named to the five-member commission.

Since Atrios has raised $161,705 (and counting) for John Kerry, by the Bush Pioneer standards, he should be entitled to an ambassadorship of Kerry's choosing or a seat on a regulatory committee of his own choosing.

Here at Angry Bear, Kash and I have raised $5,161.78 to date, well on our way to the $10,000 cumulative goal (donate here). If we hit $10,000, Kash or I might be entitled to the unpaid internship of our choice.

AB

Rumsfeld Should Go

By now, you've probably read or read about Seymour Hersh's latest for the New Yorker, The Gray Zone, in which he writes that the events in Abu Ghraib were the result of a slippery slope that began with the creation of a hihgly targeted Special Access Program:

Rumsfeld reacted in his usual direct fashion: he authorized the establishment of a highly secret program that was given blanket advance approval to kill or capture and, if possible, interrogate "high value" targets in the Bush Administration’s war on terror. A special-access program, or SAP—subject to the Defense Department’s most stringent level of security—was set up, with an office in a secure area of the Pentagon. The program would recruit operatives and acquire the necessary equipment, including aircraft, and would keep its activities under wraps. America’s most successful intelligence operations during the Cold War had been SAPs, including the Navy’s submarine penetration of underwater cables used by the Soviet high command and construction of the Air Force’s stealth bomber. All the so-called "black" programs had one element in common: the Secretary of Defense, or his deputy, had to conclude that the normal military classification restraints did not provide enough security.

Over time, and spurred by the growing insurgency in Iraq, the program expanded:

Rumsfeld and Cambone went a step further, however: they expanded the scope of the SAP, bringing its unconventional methods to Abu Ghraib. The commandos were to operate in Iraq as they had in Afghanistan. The male prisoners could be treated roughly, and exposed to sexual humiliation.

"They weren’t getting anything substantive from the detainees in Iraq," the former intelligence official told me. "No names. Nothing that they could hang their hat on. Cambone says, I’ve got to crack this thing and I’m tired of working through the normal chain of command. I’ve got this apparatus set up—the black special-access program—and I’m going in hot. So he pulls the switch, and the electricity begins flowing last summer. And it’s working. We’re getting a picture of the insurgency in Iraq and the intelligence is flowing into the white world. We’re getting good stuff. But we’ve got more targets”—prisoners in Iraqi jails—“than people who can handle them."

Cambone then made another crucial decision, the former intelligence official told me: not only would he bring the sap’s rules into the prisons; he would bring some of the Army military-intelligence officers working inside the Iraqi prisons under the sap’sauspices. "So here are fundamentally good soldiers—military-intelligence guys—being told that no rules apply," the former official, who has extensive knowledge of the special-access programs, added. "And, as far as they’re concerned, this is a covert operation, and it’s to be kept within Defense Department channels."

The military-police prison guards, the former official said, included "recycled hillbillies from Cumberland, Maryland." He was referring to members of the 372nd Military Police Company. Seven members of the company are now facing charges for their role in the abuse at Abu Ghraib. "How are these guys from Cumberland going to know anything? The Army Reserve doesn’t know what it’s doing."

There's a lot more in Hersh's piece, most of it casting substantial doubt on the current line that the problems were the results of a few low level MPs gone wild.

The Pentagon, of course, refutes Hersh's account in its entirety and released a statement on Saturday saying in part that

"The abuse evidenced in the videos and photos, and any similar abuse that may come to light in any of the ongoing half dozen investigations into this matter, has no basis in any sanctioned program, training manual, instruction, or order in the Department of Defense."

Now, Newsweek has a story out, The Roots of Turture, that is completely in accord with Hersh's account. Apparently, Newsweek obtained a Jan. 25, 2002 memo from White House Council Gonzales to President Bush, that explains the origins of lax standards [emphasis mine]:

"As you have said, the war against terrorism is a new kind of war," Gonzales wrote to Bush. "The nature of the new war places a high premium on other factors, such as the ability to quickly obtain information from captured terrorists and their sponsors in order to avoid further atrocities against American civilians." Gonzales concluded in stark terms: "In my judgment, this new paradigm renders obsolete Geneva's strict limitations on questioning of enemy prisoners and renders quaint some of its provisions."

Newsweek also goes into some detail on Powell's immediate and continuing, but ultimately fruitless, opposition to the new Geneva-Free protocol.

How did the program devolve from a tight focus on top al Qaeda targets and implementation by seasoned intelligence experts to the generalized debasement in Abu Ghraib? Newsweek also pins the blame on Rumsfeld's frustration with the worsening situation in Iraq:

Rumsfeld was getting impatient about the poor quality of the intelligence coming out of there. He wanted to know: Where was Saddam? Where were the WMD? Most immediately: Why weren't U.S. troops catching or forestalling the gangs planting improvised explosive devices by the roads? Rumsfeld pointed out that Gitmo was producing good intel. So he directed Steve Cambone, his under secretary for intelligence, to send Gitmo commandant Miller to Iraq to improve what they were doing out there. Cambone in turn dispatched his deputy, Lt. Gen. William (Jerry) Boykin—later to gain notoriety for his harsh comments about Islam—down to Gitmo to talk with Miller and organize the trip. In Baghdad in September 2003, Miller delivered a blunt message to Brig. Gen. Janis Karpinski, who was then in charge of the 800th Military Police Brigade running Iraqi detentions. According to Karpinski, Miller told her that the prison would thenceforth be dedicated to gathering intel. (Miller says he simply recommended that detention and intelligence commands be integrated.) On Nov. 19, Abu Ghraib was formally handed over to tactical control of military-intelligence units.(*)

It is increasingly implausible that the torture in Abu Ghraib was just the work of low level MPs actiing without direction from above and, accordingly, it is increasingly unlikely that this will go away soon. Two independent sources -- Hersh and Newsweek -- cite the growing insurgency in Iraq as the impetus for the orders from above to expand and "Gitmo-ize" intelligence gathering in Iraq. The roots of the insurgency lie, in no small part, in Rumsfeld's refusal to follow the advice of his senior advisors and send more troops to Iraq.

That Rumsfeld's judgement is poor can no longer be questioned; the only question at issue is whether his culpability for Abu Ghraib is direct or indirect. I am un-moderating my views: Rumsfeld should go, forthwith.

AB

(*) For some disturbing background on Boykin and Cambone, see this post from Dave Neiwert.

UPDATE: Kevin read the same two stories and notes that "Hersh says abusive interrogation was the Pentagon's idea and CIA resisted," while "Newsweek says the Pentagon and the CIA were on board, but the State Department resisted." Both sources do agree, however, that orders and direction came from above.

UPDATE 2: Matt Yglesias adds this amusing caveat:

Now at this point there's so much interagency ill-will that you could probably find "intelligence officials" willing to say they've witnessed Donald Rumsfeld communing with the devil while someone at State assures you that Colin Powell was against the whole Faustian bargain concept from the beginning.

Wow

Bush’s poll numbers keep sinking. From the latest issue of Newsweek:

May 15 - As his administration grapples with the fallout from the Iraqi prisoner abuse scandal, President George W. Bush’s approval ratings have dropped to 42 percent, according to the latest NEWSWEEK poll, a low for his presidency. Fifty-seven percent say they disapprove of Bush’s handling of the war in Iraq. And 62 percent say they are dissatisfied with the way things are going in the United States, a number that has been steadily increasing since April, 2003, when it was 41 percent.

For some historical context on how these numbers may translate into an election outcome, see this post on The American Street. The Newsweek article goes on to note that Bush’s falling support has not translated into increasing support for Kerry. I’m not quite sure what the explanation for that is, other than the obvious – Kerry hasn’t inspired one-time Bush supporters, who may be disillusioned with the president but are not particularly attracted to Kerry, either. The crucial question is whether the Kerry campaign can change that.

Kash

Minor Changes

I've moved most slow-loading scripts (e.g., sitemeter) to the right panel, which should mean that the page will load the center panel before running them (which sometimes causes the page to hang for a while before loading). If this works then you will be able to read the hot fresh content while the rest of the page is loading.

I still need to fix the blogroll, which also hangs sometimes. One plan is to just switch it with the book recommendations (I put the images directly on the site instead of using Amazon to host them.) The other plan is to maintain it manually. Whichever I choose, by Monday slow-loading should be a thing of the past.

Thanks to twh, Wayne B., and Kevin Drum for the tips.

AB

New Data: Everything’s Up

The CPI was up in April, with the core rate rising 0.3%. The 12-month change in the core CPI is therefore up 1.8%, another sign that the US inflation rate is still rising. Just a few months ago the 12-month core CPI inflation rate was only 1.25%. (By the way, the reason that I like to use the core CPI is because it's less volatile than the full CPI, and thus better reflects the underlying inflation pressures in the economy. However, the full CPI does a better job of depicting what's happening to real purchasing power.)

Meanwhile the Fed’s monthly estimate of industrial production shows a healthy rise in April, too. The same data release shows that capacity utilization is also up, to its highest level in 3 years. The rise reflects increases in both manufacturing and in other industrial activities.

Finally, interest rates are also up, though they seem to have leveled off over the past week or so at their highest levels in about 2 years. The 10-year bond now yields around 4.8%, and the 5-year bond yields around 4.0%. Both of these interest rates are about 1 full percentage point higher than 2 months ago.

These are all classic signs of solid economic growth. The recovery is indeed in full swing.

The question of sustainability is still an open one, though. Will housing prices peak and start to fall? Will the impetus provided by tax cuts and government spending wane in coming months? Will consumers slow their spending as interest rates rise and house prices fall? (See Karsten's post below for more on this.) Will the price of oil cut into the recovery this summer? I’ve been answering yes to all of these questions for a while, and I don’t see any reason to change my answer yet. I don’t think that anything dramatic will happen, but I do think that all of these forces will have some effect, and that the economy will noticeably cool later this year.

Kash

Postcards from Old Europe - In debt we trust

The FOMC's recent change in the wording of their statement has clearly shown that the times of E-Z financing are coming to an end. The recent past has seen the Fed engineer a near-rational bubble in asset prices which has served to push household wealth up past the levels of the stock market bubble. Cheap credit has supported household spending at a time in which incomes have been growing at a snail's pace.

A quick series of (substantial) interest rate hikes could therefore lead to a substantial slowdown in consumption and thereby negatively impact future GDP growth. Consumer credit delinquency rates are already at near record highs while ever more home buyers finance their homes with no money down and use adjustable rate mortgages to squeeze out a larger loan. The reasoning behind this behavior is nicely stated in this NY Times article. Excerpt:

"I'm too young to be scared," he said last week, betting that both the value of the house and his income will keep rising. If the bet fails, he said, it will not be the end of the world, adding: "There is a difference between being poor and being broke. Being broke is more of a temporary condition. Donald Trump has been broke a couple of times."
[...]
Mr. Thompson, who completed the purchase of his townhouse near Denver on Friday, said he would have qualified to borrow $330,000 if he had taken out a traditional fixed-rate mortgage. He qualified for a loan up to $550,000 by taking an adjustable-rate mortgage that will be constant for the first five years and that requires only interest payments.

What I like most about this statement is that the person cited is supposed to be a "management consultant". I'm sure that an optimist like him is much in demand!

This kind of mindset has kept consumers spending all through the recent economic weakness and has also served to boost consumer credit to a level of over $2 trillion. Total household debt is at a level of around 90% of GDP and the average American now spends almost 20% of their disposable income servicing debt. This is in sharp contrast to Euroland where household debt stands at around 60% of GDP.

The picture looks a little different if you look at household debt as a percentage of disposable income. Some European countries - such as Germany or the Netherlands - have a household debt to disposable income ratio which is higher than the US ratio. The Euro-average is around 30% below the US level though.

Another thing to keep in mind is the evolution of the savings rate. While the US savings rate is at a rock bottom 2% the Euro-average stands at around 13%! Europeans have reacted to sluggish economic growth and high unemployment by retrenching and saving more. In sharp contrast US consumers have decided to take a different course and spend more - even if it means taking on more debt.

The US consumer's decision has been vindicated by the behavior of asset prices. Up until the popping of the bubble the stock market did the job of saving for the individual. Rising house prices took up much of the slack after the bubble burst. This asset price inflation with corresponding price disinflation has made many households feel wealthy and consume more.

The only problem is that asset prices are just numbers in a ledger until you liquidate the asset. You need real money to consume and pay down debt. The worst scenario would entail your debt-service costs rising faster than your income - this leads to a sharp curtailing of other expenses to reduce the onerous costs of debt. This scenario isn't that far-fetched. Anyone with an adjustable rate mortgage or sizeable credit card debt should think long and hard about what could happen.

If the Fed really takes the bunch bowl away by raising - say - by 150bp over the next 12 months people with adjustable credit terms will find that E-Z financing can quickly turn into E-Z bankruptcy. While the press tells us that consumers are getting more bang for their (debt service) buck

[...]thanks in part to lower interest rates, monthly debt payments consume a smaller share of monthly income today than in late 2001.

we shouldn't forget that this doesn't mean that people are actually saving money. Consumers have simply adjusted the amount of principal upwards!

To sum it up: while Eurozone consumers are saving more and spending less, US consumers are borrowing more and spending more. The US private sector has kept the economy afloat over past years - albeit at the cost of rising exposure to the vagaries of the financial markets. Households have turned into mini-banks who have to manage their assets and liabilities in such a fashion that they remain solvent. Let us hope that they're up to the task!

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